- Investment flows into gender lens funds are rising, but their financial performance is raising doubts as to how effective they are.
- Capital Monitor analysis of more than 2,500 of the same funds finds the average “gender” score has declined by 9 percentage points in 2021.
- Unlike the funds themselves, most companies do not explicitly equate having a gender policy with improved financial performance.
The pandemic has exacerbated gender inequality worldwide. School closures and the positioning of women as primary caregivers has meant that they have been hit by job losses disproportionately. According to a July report from the International Labour Organisation (IOL), 4.2% of women’s employment was lost between 2019 and 2020 compared with 3% for men.
Projections from the IOL indicate that employment growth will be insufficient this year to bring women back to pre-pandemic levels. Those hit hardest are women of colour, disabled women and young women, according to data from the Washington, DC-based National Women’s Law Center.
Despite being socially and economically shielded from the worst effects of the widening inequality gap, women in senior positions have also suffered setbacks since the pandemic.
The share of women being appointed as chief executives rose, in line with the recent trend, to 12% during the five months before the pandemic took hold, but reversed afterwards to just 6% from March 2021, according to a Heidrick & Struggles analysis of the backgrounds of CEOs at 964 companies across 20 markets globally.
The recruitment firm attributes this drop to companies reverting to more “traditional” hiring criteria during a crisis; for example, focusing more on prior CEO experience, which women are less likely to have.
Funds hit by gender shift
These changes affect the sustainability ratings of investment funds graded on a variety of ESG metrics that include women in senior roles. A Capital Monitor analysis of more than 2,500 of the same funds finds the average score has fallen this year by 9 percentage points to 38%, based on the ratings of gender equality data provider Equileap.
Equileap scores companies on criteria including the number of women in the workforce and at senior levels, gender pay gap and sexual harassment policies. The scores for each fund were calculated from the average Equileap score for all of a fund’s portfolio companies. For context, the average score for the top 100 companies globally is 62%.
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That the overall scores have deteriorated for these funds over the past year could indicate that either individual company scores have declined or those same funds have moved investment away from high-scoring companies.
In its latest annual report published in March 2021, Equileap concludes that while gender equality in the workplace seems to have improved since 2017, “we are still far from reaching gender balance in the workplace”.
Gender lens investments
This is the landscape in which gender lens investing is seeking to thrive. It is an investment strategy that takes into consideration gender-based factors, such as the number of women in leadership (WIL), with the intention of promoting gender equality and delivering strong financial performance.
The most comprehensive database on gender lens funds is put together by Parallelle Finance. As of May 2021 it tracked 29 gender lens equity funds (GLEFs) centred on a WIL philosophy. Many of these funds employ internal WIL indices, meaning they are supposed to track a selection of companies with higher levels of WIL positions than industry norms.
Appetite for gender lens investing is increasing. The assets under management (AUM) of the 29 funds grew 21% during the first quarter of 2021 compared with last year, reaching a total of $3.28bn. That figure rose to $3.55bn between March and August 2021, according to Parallelle.
Wishful thinking?
Yet while investor interest is growing, the assumption that diversity within companies increases financial performance is under scrutiny.
Recent research conducted by McKinsey claiming that companies in the top quartile for gender diversity on executive teams were 25% more likely to outperform on profitability is often cited by fund managers looking to justify their strategies.
But critics claim gender lens funds have failed to live up to financial expectations. One big blow to their credibility came after the Financial Times published research in February this year revealing that the funds have collectively underperformed their relative benchmarks.
Based on Morningstar data, the publication was subsequently criticised for only showcasing a small handful of funds within the gender lens universe, focusing on just one specific period and measuring fund performance against broad cap-weighted indices instead of equal-weighted indices.
Capital Monitor analysed data from Parallelle Finance on a wider selection of gender lens funds over a series of periods. It found that while gender lens funds do not tend to outperform their relative benchmarks overall, they do in a few cases.
Regardless of how you cut it, however, gender lens funds appear to be neither strongly under or outperforming their peers. This lends weight to those who argue that some fund managers may be overplaying the body of evidence pointing to the connection between gender and performance; as long as gender inequality persists at company level, it will be hard to establish what benefits equality can offer (see chart below for fund performance).
Digging into the composition of these gender lens funds does reveal some interesting insights that may help answer why they are not performing any differently from conventional funds.
Other than being slightly underweight information technology stocks, the holdings of gender lens funds appear very similar to those that reference benchmark indices, notably the popular MSCI ACWI index. And, according to Equileap’s 2020 scorecard, none of these sectors scored over 50% on gender equality.
As of March this year, the top 11 holdings of these 29 gender lens funds were: Microsoft, Amazon, Esteé Lauder, Accenture, Adobe, Visa, Walt Disney, American Water Works, Paypal, Recruit Holdings and Starbucks.
Unlike the funds themselves, most companies do not explicitly equate having a gender policy with improved financial performance.
But a number do indicate this is the case. For example, Microsoft’s 2019 gender report states: "Diverse and inclusive companies are not only more innovative and profitable, they’re better at retaining top talent who can meet the needs of customers from a wide range of communities."
Surprisingly, 54% of the 148 top holdings of the 29 funds do not score on any WIL measures, such as board parity or having a female CEO, according to Parallelle Finance. Worse still, only 44 of these holdings are found on the Equileap Global Gender Equality top ten funds list.
One potential reason could be that fund managers are not responding to material changes occurring within their portfolio companies. So, if a female CEO is replaced by a male CEO and a company gets knocked off an Equileap scorecard, it remains in the fund. (Between 2009 and 2017, just three out of 19 Fortune 500 female CEOs were replaced by another woman.)
Gender lens funds – best of a bad bunch?
The extent to which these funds can be seen as not taking gender equality seriously enough is debatable because what constitutes a gender-diverse board is, to some extent, subjective. While the number of women in senior positions in companies within the Pax Ellevate Women’s Leadership fund, for example, is fairly low, it is high compared with the MSCI World Index. This points to the fact it is hard to reflect gender equality in a world where women are not equally represented.
As Marypat Smucker, founder of Parallelle Finance, says, the companies that make up the gender lens funds in question are the best of a bad bunch, as the current levels of women in leadership is “bleak”. She tells Capital Monitor: “There are no sectors that are really scoring well on gender diversity – that’s one of the things these funds are up against.”
If that is true, it begs serious questions of how existing gender lens funds should be marketing themselves and their ability to extract alpha or drive real change.
There is also some evidence that some fund managers are changing tack when it comes to gender lens investment.
A few months ago, Axa Investment Managers (IM) altered the strategy of its Axa Framlington Women Empowerment fund, even renaming it as the Axa WF Framlington Social Progress fund, abandoning gender lens investing in favour of a different approach.
Caroline Moleux, senior equity portfolio manager at Axa IM, tells Capital Monitor that gender diversity is “a theme we decided to cover in a more transversal way and through engagement with the companies we invest in, across all our strategies… We believe we still have to [educate] around this and engage with companies, so they improve on that topic.”
The Axa WF Framlington Social Progress fund invests in companies that address a range of social needs that "sustain human progress". Last year, Gender Equality (Sustainable Development Goal 5) was Axa’s second key engagement topic following Climate Action (SDG 13), and expanding its gender diverse voting policy is one of its 2021 priorities.
In 2020, less than half of investors (48%) voted in favour of resolutions asking companies to disclose their gender pay gap, according to non-profit campaign group ShareAction. It appears that investor engagement through companies on gender issues must be a priority for the benefits of gender lens investing to shine through.
